Case Number: SC117842 Hearing Date: May 21, 2014 Dept: M

Tentative Ruling
Costner v. Morgan Creek Productions
SC117842

This is an action by actor Kevin Costner and his loan out corporation against two production companies. Plaintiffs allege that Defendants have not shared profits from the film “Robin Hood: Prince of Thieves” as required by the pertinent acting agreements between the respective sides. Pursuant to the sustaining of a demurrer, the Plaintiffs filed a TAC alleging the following c/a:

First c/a- Breach of contract
Second c/a- Breach of implied covenant of good faith
Third c/a – Fraudulent concealment

Defendants demur only to the third c/a, Fraudulent Concealment, claiming that the tort claim is merely a rehash of their breach of contract claim (the “TAC is Plaintiffs’ fourth attempt to tortify what is at best a questionable breach of contract claim….”). Defendants, in another thoughtful brief, suggest that Plaintiffs’ TAC “restates virtually the same deficient allegations of fraud that were alleged in Plaintiffs’ SAC” which the Court found wanting due to the “economic loss rule”. In essence, the Court found that the Fraud claim lacked any “additional conduct beyond the failure to perform the contract”. The Defendants argued that the fraud claim was founded on the contractual obligations and did not arise from any independent duty imposed by principles of tort law, citing Erlich v. Menezes (1999) 21 C 4th 543, 551, Hunter v. Up-Right, Inc. (1993) 6 C 4th 1174, Aas v. Superior Court (2000) 24 C 4th 627, and Rosen v. State Farm Genereal Ins. Co. (2003) 30 C 4th 1070, 1079-1080. Defendants reiterate that argument here, and re-argue that Plaintiffs also fail to allege specific facts that Defendants had the requisite specific intent to defraud Plaintiffs and to induce the Plaintiffs to act, or in this case, not to act.

Plaintiffs have filed a well written and thorough opposition asserting that the complaint outlines how Defendants concealed their intentional under-reporting of home video revenue by not providing the “greater” of the two methods of calculating what Plaintiffs were owed. Plaintiffs argue that Defendants had a duty to disclose “truthful, accurate, full, and complete” revenue information and intentionally failed to do so. Plaintiffs allege that Defendants deliberately failed to specify the methodology of calculating the “Gross Receipts” with the deliberate intent to deceive and defraud Plaintiffs, and to prevent Plaintiffs from discovering the under-reporting in the hope that Plaintiffs would accept the under-reporting and never discover that Defendants had reported millions of dollars less in revenue, depriving Plaintiffs of the money they were rightfully due under the contract. Plaintiffs do not highlight changes in their pleadings to establish their argument that the Defendants’ conduct falls outside the “economic loss rule”. Plaintiffs direct the Court to Robinson Helicopter Company v. Dana Corporation (2004) 34 C 4th 979, 993, for the proposition that the case at bar falls outside the confines of the “economic loss rule” because “no rational party would enter into a contract anticipating that they are or will be lied to.” Id. Plaintiffs forcefully, and understandably, argue that Defendants knew they were under-reporting the home video revenue, knew that this material information was neither known, nor readily accessible to the Plaintiffs, denied the Plaintiffs access to the hidden information, and failed to accurately account to the Plaintiffs all with the intention of retaining millions of dollars the Plaintiffs earned pursuant to their agreement.

The Court requested further briefing on the issue of the application of the “economic loss rule” because Plaintiff’s claimed it had no application to this type of service agreement and Defendant claimed it had been applied in additional circumstances. Plaintiffs’ supplemental brief reiterates the position that the “economic loss rule” has no application to this type of case. Plaintiffs claim that the allegations in the TAC are sufficient to establish the “tortious breach of contract” predicated on the fraudulent concealment of the proper home video revenues with the intent to defraud the Plaintiffs so that Plaintiffs never discovered the underreporting and Defendants would be unjustly enriched to Plaintiffs’ detriment. Plaintiffs have directed the court to three unpublished cases: one from the 9th Circuit, and two from the California Courts of Appeal (unciteable cases pursuant to CRC rule 8.1115 – a rule that makes very little practical sense any longer). The principal case cited is H.B. Films, Ltda. V. CBS, Inc. (9th Cir. 2004) 98 Fed.Appx. 596, which found that, consistent with Astrium v. TRW (C.D.Cal. 2003) 254 F.Supp.2d 1129, in the absence of the action arising from the sale or purchase of a defective product, the ‘economic loss rule’ only applied if the losses were accompanied by either physical damage or bodily injury. H.B. Films (supra) at page 599. The H.B. Films court relied on Roddenberry v. Roddenberry (1996) 44 CA 4th 634. (In the earlier tentative rulings, this Court has already distinguished Roddenberry based upon the additional misrepresentation, not contemplated in their agreement, which provided the basis to establish a distinct legal duty for the fraud claim outside the confines of the contract.)
Defendants have also filed a supplemental brief which includes five Federal District Court cases applying California law, and, particularly, the “economic loss rule” to situations that have nothing to do with a defective product. Each of the cases held that the fraud (and one negligence) claim was founded on the contractual obligations and did not arise from any independent duty imposed by principles of tort law:

1. Audigier Brand Management v. Rhita Perez (C.D.Cal. 2012) Lexis 161291 – a profit participation dispute regarding use of a trademark wherein the court found that “[W]ithout a viable theory of damage apart from plaintiff’s economic losses, plaintiff fails to state an actionable claim for fraud.” Id. at p. 18;
2. Legal Additions LLC v. Kowalski (N.D. Cal. 2010) Lexis 25996, *2 – a legal placement service contract dispute wherein plaintiff sued for breach of contract and fraud and the court, citing Robinson Helicopter, found that the “economic loss rule requires a purchases to recover in contract for purely economic loss due to disappointed expectations, unless he can demonstrate harm above and beyond a broken contractual promise. Quite simply, the economic loss rule prevents the law of contract and the law of tort from dissolving one into the other.” (emphasis added) The court went on to distinguish Robinson Helicopter by holding that the plaintiff “failed to point to any harm above and beyond Defendants’ broken contractual promise.” Legal Additions (supra) at p. *12;
3. Neu v. Terminix Int’l, Inc. (N.D. Cal. 2008) WL 962096, *4 – a termite inspection, treatment and repair contract dispute wherein the court stated the following: “[P]laintiff essentially argues that the economic loss rule does not apply because the contract here was for services. However, this Court has held more than once that ‘the limitation on tort recovery applies to the negligent performance of services as well as to the negligent manufacture of goods.” citing Rejects Skate Magazine, Inc. v. Acutrack, Inc., 2006 U.S. Dist. LEXIS 63157, *12 (N.D. Cal.) in Neu (supra) at p.*12;
4. Weboost Media S.R.L. v. LookSmart Ltd., (N.D. Cal. 2014) 2014 U.S. Dist. Lexis 26921 – an internet advertising dispute wherein the court stated that under the economic loss rule, “parties alleging fraud or deceit in connection with a contract must establish tortious conduct independent of a breach of the contract – not just violation of a promise that undermines a party’s expectation under the contract.” Citing Robinson Helicopter at p. 990 in Weboost (supra) at p. 14*; and
5. Multifamily Captive Group, LLC v. Assurance Risk Managers, Inc. (E.D. Cal. 2009) 629 F. Supp. 2d 1135 – appropriately outlined in the Defendants’ brief pages 4-5.

SUSTAINED WITHOUT LEAVE THE 3RD C/A

Having reviewed the moving papers, the court tentatively rules as follows:

1. The function of a demurrer is to test the legal sufficiency of a complaint, but not the truthfulness of the allegations. Donabedian v. Mercury Ins. Co. (2004) 116 CA 4th 968, 994;

2. The allegations of a complaint must be regarded as being true for purposes of ruling upon a demurrer. Dryden v. Tri-Valley Growers (1977) 65 CA 3d 990, 998;

3. A demurrer can be used only to challenge defects that appear on the face of the pleading under attack, or from matters outside the pleading that are judicially noticeable. Blank v. Kirwan (1985) 39 C 3d 311, 318; Donabedian (supra) at p. 994;

4. When considering demurrers, courts read the allegations liberally and in context. Taylor v. City of Los Angeles Dept. of Water and Power (2006) 144 CA 4th 1216, 1228;

5. “The defendant cannot make allegations of fact in the demurrer which, if true, would disclose a defect in the complaint.” Ion Equipment Corp. v. Nelson (1980) 110 CA 3d 868, 881; Cook v DeLa Guerra (1864) 24 C 37, 239;

6. “The defendant cannot strengthen the demurrer by bringing in evidentiary material that discloses a defect in the complaint. It is wholly beyond the scope of the inquiry to ascertain whether the facts stated are true or untrue. That is always the ultimate question to be determined by the evidence upon a trial of the questions of fact.” Colm v Francis (1916) 30 CA 742, 752;

7. The elements of a cause of action for fraudulent concealment are: “(1) the defendant must have concealed or suppressed a material fact, (2) the defendant must have been under a duty to disclose the fact to the plaintiff, (3) the defendant must have intentionally concealed or suppressed the fact with the intent to defraud the plaintiff, (4) the plaintiff must have been unaware of the fact and would not have acted as he did if he had known of the concealed or suppressed fact, and (5) as a result of the concealment or suppression of the fact, the plaintiff must have sustained damage.” Marketing West, Inc. v. Sanyo Fisher ( USA ) Corp. (1992) 6 CA 4th 603, 612–613;

8. While “[b]oth state and federal rules for pleading fraud require that fraud be alleged with specificity, … neither requires the pleader to go into minute detail ….” Gervase v. Superior Court (1995) 31 CA 4th 1218, 1244, n. 16 (emphasis added);

9. It is well established that “less particularity is required where the defendant may be assumed to have knowledge of the facts equal to that possessed by the plaintiff.” Jackson v. Pasadena City School Dist. (1963) 59 C 2d 876, 879;

10. The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises. Therefore, “willful” breaches have not been distinguished from other breaches. Harris v. Atlantic Richfield Co. (1993) 14 CA 4th 70, 77-78 referencing Rest.2d Contracts, Introductory Note, ch. 16, p. 100;

11. The restrictions on contract remedies serve purposes not found in tort law. They protect the parties’ freedom to bargain over special risks and they promote contract formation by limiting liability to the value of the promise. This encourages efficient breaches, resulting in increased production of goods and services at lower cost to society. (See Comment, Reconstructing Breach of the Implied Covenant of Good Faith and Fair Dealing as a Tort (1985) 73 Cal.L.Rev. 1291, fn. 3.);

12. Because of these overriding policy considerations, the California Supreme Court has proceeded with caution in carving out exceptions to the traditional contract remedy restrictions. (See, e.g., Seaman’s Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 C 3d 752,769; Foley v. Interactive Data Corp. (1988) 47 C 3d 654, 694, 696;

13. The most widely recognized exception is when the defendant’s conduct constitutes a tort as well as a breach of the contract. For example, when one party commits a fraud during the contract formation or performance, the injured party may recover in contract and tort. Harris (supra) at 77-79 citing Godfrey v. Steinpress (1982) 128 CA 3d 154 (knowing nondisclosure of termite damage), see also Robinson Helicopter (supra) at p. 991 (“when one party commits a fraud during the contract formation or performance, the injured party may recover in contract and tort”) quoting Harris (supra) at 77-79;
14. However, Robinson Helicopter has i
t limits: “Our holding today is narrow in scope and limited to a defendant’s affirmative misrepresentations on which a plaintiff relies and which expose a plaintiff to liability for personal damages independent of the plaintiff’s economic loss.” Id. at p. 993:

a. Robinson Helicopter pointed to two bases for its holding to extend the “economic loss rule” to misrepresentations:

i. Misrepresentations that put people or property at risk (notwithstanding the ruling in Aas for negligent conduct), and

ii. public policy that encourages a business climate free of fraud and deceptive practices – see the following:

1. In distinguishing Aas (supra) the Supreme Court stated that “Aas was a negligence action brought by homeowners against the developer, contractor, and subcontractors who constructed their dwellings. The homeowners sought damages for construction defects that had not caused any property damage. ( Aas v. Superior Court, supra, 24 Cal.4th at p. 632, 101 Cal.Rptr.2d 718, 12 P.3d 1125.) We concluded the defects must cause property damage prior to being actionable in negligence. (Id. at p. 650, 101 Cal.Rptr.2d 718, 12 P.3d 1125.) The language in Jimenez cited by the dissent deals with the propriety of applying the economic loss rule as a bar in strict liability actions “ ‘when no safety concerns are implicated because the damage is limited to the product itself.’ ” (Dis. opn., post, 22 Cal.Rptr.3d at p. 367, 102 P.3d at p. 280, quoting Jimenez v. Superior Court, supra, 29 Cal.4th 473, 490, 127 Cal.Rptr.2d 614, 58 P.3d 450 (conc. & dis. opn. of Brown, J.).) In both circumstances, “ ‘recourse … in contract law to enforce the benefit of the bargain’ ” is sufficient. (Ibid.) In contrast, Robinson’s claims are based on Dana’s intentional and affirmative misrepresentations that risked physical harm to persons. Robinson’s helicopters are flown by and carry people. A properly functioning sprag clutch is vital to the safe performance of the aircraft, and compliance with the certificate requirement is part of an integrated regulatory scheme intended to ensure their safe operation. The economic loss rule is designed to limit liability in commercial activities that negligently or inadvertently go awry, not to reward malefactors who affirmatively misrepresent and put people at risk.” Robinson Helicopter (supra) at p. 991, fn 7; and

2. California’s public policy also strongly favors this holding. “[C]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” (Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 107, 44 Cal.Rptr.2d 420, 900 P.2d 669 (conc. & dis. opn. of Mosk, J.).) Similarly, “ ‘[c]ourts should be careful to apply tort remedies only when the conduct in question is so clear in its deviation from socially useful business practices that the effect of enforcing such tort duties will be … to aid rather than discourage commerce.’ ” (Erlich v. Menezes, supra, 21 Cal.4th at p. 554, 87 Cal.Rptr.2d 886, 981 P.2d 978.) “In pursuing a valid fraud action, a plaintiff advances the public interest in punishing intentional misrepresentations and in deterring such misrepresentations in the future. [Citation.] Because of the extra measure of blameworthiness inhering in fraud, and because in fraud cases we are not concerned about the need for ‘predictability about the cost of contractual relationships’ [citation], fraud plaintiffs may recover ‘out-of-pocket’ damages in addition to benefit-of-the bargain damages.” (Lazar v. Superior Court, supra, 12 Cal.4th at p. 646, 49 Cal.Rptr.2d 377, 909 P.2d 981.) In addition, “California also has a legitimate and compelling interest in preserving a business climate free of fraud and deceptive practices.” (Diamond Multimedia Systems, Inc. v. Superior Court (1999) 19 C4th 1036, 1064, 80 Cal.Rptr.2d 828, 968 P.2d 539.) Needless to say, Dana’s fraudulent conduct cannot be considered a “ ‘socially useful business practice[ ].’ ” (Erlich v. Menezes, supra, 21 Cal.4th at p. 554, 87 Cal.Rptr.2d 886, 981 P.2d 978.) As one court stated, “Simply put, a contract is not a license allowing one party to cheat or defraud the other.” (Grynberg v. Citation Oil & Gas Corp. (S.D.1997) 573 N.W.2d 493, 501.) Allowing Robinson’s claim for Dana’s affirmative misrepresentation discourages such practices in the future while encouraging a “business climate free of fraud and deceptive practices.” (Diamond Multimedia Systems, Inc., at p. 1064)” Robinson Helicopter (supra) at p. 991-992.

15. Initially, it should be clear that the Robinson Helicopter Court was dealing with misrepresentations and not fraudulent concealment as we have in the case at bar. However, despite the potential additional opening of the floodgates that might ensue, one would be hard-pressed to analyze the unconscionable behavior as any less problematical. The rationale outlined where “people or property are at risk” is consistent with a long line of cases applying the “economic loss rule” where benefit of the bargain damages are appropriate because the injury is limited to damage to the product itself, or, in other words, arising from the breach of contract only. In the case at bar, no people or property were placed at risk based upon the fraudulent concealment of material facts outlined by the Plaintiffs in their TAC. In fact, the only damages alleged, beyond contract benefit of the bargain damages, are punitive damages to punish the alleged misbehavior unavailable in the other c/a in the TAC;

16. Despite the lack of risk to person or property, the policy considerations outlined in Robinson Helicopter are equally applicable to the instant case. Allowing the claim for fraudulent concealment, as outlined in the TAC, discourages such practices in the future while encouraging a business climate free of fraud and deceptive practices;

17. However, the Court finds that Defendants’ analysis of the TAC is controlling here because to find otherwise, will simply eviscerate the “economic business rule” and the rationale behind it. To allow tort damages for misrepresentations and fraudulent concealments related to contractual obligations without the requirement for any additional risk of damage to person or property or any additional duty beyond that which was contemplated in the contract itself, opens the floodgates to “tortifying” every contract dispute by second guessing the motives and reasons for the breach. This is exactly the type of risk to commercial activity that the economic business rule was imposed to prevent;

18. Where a claim is not properly pled, the burden is on the party opposing the demurrer to show that he, she, or it can amend the subject cause of action to state it in a valid manner. Goodman v. Kennedy (1976) 18 C 3d 335, 349 (“Plaintiff must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading”); Hendy v. Losse (1991) 54 C 3d 723, 742;

19. The Plaintiffs have not done so here, so the Court will not grant the Plaintiffs an additional opportunity to establish the requisite independent legal duty beyond the requirements of the contract; and

20. CRC 3.1320(g) provides: “Following a ruling on a demurrer, unless otherwise ordered, leave to answer or amend within 10 days shall be deemed granted….”